Different Types of Bank Risks and Banking Complications

July 23, 2014 | by | 0 Comments

Banking comes from the word banks which means ‘bench’. A bank is a safe place to save cash as deposits. It is a financial institution and financial intermediaries that accepts deposits and making them available to borrowers by lending activities with corresponding interest rates and penalties.

They are intermediary of customers that keep 10% of customers’ deposits on hand and lending 90%. They lend the money to credible borrowers more often with collateral. It can be land titles, an auto loan, or even student loans. They earn by simply charging higher interest rates on loans than their deposits.

The City of London, one of the biggest banking centres of the world

The City of London, one of the biggest banking centres of the world

You can use retail banking or do online banking. The most common banking is the commercial banking. The central bank is the example of this banking system. The primary purpose of central banks is to manage monetary policy. It has supervisory powers to prevent bank run and reduced the risks that commercial banks and other financial institutions engaged in fraudulent behavior.

It determines the interest rates, controls the nation’s entire money supply, manages the country’s foreign exchange and gold reserves, regulates and supervises banking industry, set the official interest rates in time of inflation and ensures that it will be implemented via policy mechanism.

Today, bank also has online banking through the use of the internet. There is also a so-called private banking that offers services for private individual that requires a huge amount of money to be deposited.

A recent article from Lanemegleren.no shows that banks face numerous risks in conducting their business, these are: Credit risk, it is the risk of loss arising from borrowers. Liquidity risks are banking risk that the bank faces when financial instruments such as securities and assets can not be traded immediately to prevent possible loss.

Market risks, is due to the decrease in the value of the investments or trading portfolio. Operation risks arise from the company’s business functions. A reputational risk is related to the trustworthiness of the business. And Macroeconomic risks, is due to the aggregate economy the banks is operating in.

Banks plays special roles in the economy. They issue money in the form of banknotes. They act both as collection and paying agents, they are also credit intermediaries; they lend money to commercial and personal borrowers.

Banking becomes complicated as they entered into sophisticated investments and insurance products that lead into banking credit crisis and the federal government spent billions just to add liquidity to the financial markets.

Banking crisis or bank run happens when large numbers of customers withdraw their deposits at the same time or transfer funds into government bonds because they thought that the banks may become insolvent. Bank panic is a situation that many banks suffer from bank run at the same time because people suddenly want to convert their deposits into cash at the same time.

The bank secrecy act of 1970 prevents money laundering and other banking risks. It requires financial institution to keep records and report of suspicious activity that signifies money laundering, tax evasion and other criminal activities. The client, however, is protected by bank policy of confidentiality which means that the banks cannot divulge the identity of their clients to the public.

Category: Business

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